Gold Bulls Look Tired After Strong Run Into 2023

Gold (XAU/USD) Price, Charts, and Analysis

Gold prices remain trapped below the key psychological resistance level of $2000/ounce on Wednesday with the wait to hear from the US Federal Reserve dominating this market as all others. There are some signs however that the metals long rally is losing steam and that question will surely be revisited once the Fed has said its piece.

The Fed is expected to raise interest rates by a quarter basis point. But the meat of the event is likely to be in how closely Chair Jerome Powell‘s commentary chimes with the markets’ view that one more such rise is coming before a long hiatus and then, possibly, a measured reduction in borrowing costs.

Higher interest rates should bode ill for gold. As a non-yielding asset, it can be expected to do poorly when ‘risk-free’ paper such as US Treasuries offers a higher prospect of return. However gold has caught a strong bid since November despite higher rates. Between recession fears in many major economies, ongoing war in Ukraine, and still-rampant inflation there‘s more than enough it seems to shore up gold’s traditional haven bid.

Gold Demand Remains Strong

That perceived haven status has reportedly been behind the strong demand for gold seen since the end of last year. The World Gold Council said that annual gold demand was up 18% in 2022, to 4,714 tonnes. That‘s the highest tonnage since 2011. The increase was driven by what the WGC called ’colossal central bank buying along with strong demand from retail investors.

Gold prices have also posted three straight monthly gains, largely driven by a softer dollar and bets that the bulk of US interest rises are now far behind us.

Gold Prices Technical Analysis

The broad trading range seen on Tuesday was important for gold as it took prices below an uptrend line that had previously been intact since the lows of early November last year.

It‘s all-buy certain however that the wait for the Fed will have thinned activity and, in any case, given that gold has essentially been a one-way bullish bet since then, some consolidation is probably a very good thing even from the bulls’ standpoint.

So long as that consolidation happens above even the first Fibonacci retracement of the rise up from November‘s lows to late January’s peaks then those bulls probably wont have much cause to worry. That retracement comes in at $1869.29, well below the current market and a level not in play since January 9.

Still, the price will need to use that platform to stably revisit January 25s peak of $1947.22 before a climb back to the top of last March over $2000 can be attempted.

Sentiment data from IG traders is unfortunately rather unhelpful as a directional cue. At 1030GMT on Wednesday the split between bulls and bears was exactly 50/50.

However, the long-term trend for gold looks much less ambiguously bullish. Prices remain hugely above an uptrend line which stretches back to 2006.

This suggests that prices could plummet as low as $1400 without breaking the underlying uptrend. Indeed the current market setup would seem to make an upside test back above $2000 a far more likely near-term prospect for the yellow metal.

--By David Cottle for DailyFX